It’s been a pretty flat couple of months of trading for IT outfit DWS Ltd [ASX:DWS].
However, that all changed this morning.
The DWS share price roared 30% higher out of the gates. Soaring on the news that HCL Australia, a private company, has made a bid to acquire DWS.
A move that comes just one month after DWS posted a relatively flat FY20 result.
So, is this takeover a bargain for HCL — or did DWS shareholders just get a free out at a juicy premium?
Terms of agreement
First of all, let’s talk numbers.
With an offer of $1.20 per share, plus a commitment to pay out DWS’ 3-cent dividend, HCL’s bid presents a serious premium to DWS shareholders. Roughly 36.7% above the previous closing price of 90 cents per share.
Keep in mind, this is an all cash deal too. There is no scrip component, as HCL is a private company.
At face value, that is bound to please shareholders. Offering them a sizeable and immediate return on an investment that was hit hard by the COVID crash. Not to mention the sideways trading that has gripped the stock in recent months.
For that reason, it is no surprise that CEO and top shareholder, Danny Wallis, is embracing the deal with open arms. And no doubt many other shareholders will too.
As for the business itself, well it’s certainly stable but nothing flashy.
DWS made $167.9 million worth of sales in FY20. With an underlying EBITDA of $28.5 million. Both of which had marginally improved from the year prior.
And with a net profit of $7.5 million, DWS is by no means a stock worth scoffing at. But, while they may be in business of IT, they aren’t your typical tech stock.
Even now, with a P/E ratio of 15.8 they are priced like a value stock. Not some high-flying, speculative growth play.
For that reason, I am curious as to how HCL plans to utilise this business. Because if they aren’t hoping to grow it, then they will be waiting a long time to recoup the full return on investment.
I’m not going to say they overpaid for the stock, just that I suspect that they have bigger plans for it than the current team had. As HCL’s executive vice president Michael Horton notes:
‘We are excited for this expansion of HCL technologies in Australia and New Zealand and are confident that our combined strengths will further accelerate the digital transformation journeys of our clients and innovations for their customers.
‘We look forward to welcoming the DWS team to HCL and creating enhanced global learning and career opportunities for them.’
With that in mind, it would seem both parties will walk away happy.
Current shareholders get a nice return. And HCL gets the chance to turn DWS into an even more formidable player in the IT sector.
More consolidation on the horizon?
Perhaps the biggest surprise of this entire deal is that it happened at all.
The recent market volatility (both up and down) has seen the rate of mergers and acquisitions reach pitiful levels. Which is surprising given the fact that there are quite a few small-cap stocks that are in bargain territory at the moment.
Perhaps though, it is because few companies are willing to part with any cash at the moment. After all, this pandemic is still far from over by the looks of things.
For that reason alone, it is exciting to see HCL make this bold move. One that may spark others into action.
We’ll have to wait and see, anyway.
In the meantime though, now is a great time to look into ‘high-value small-caps’. Stocks that we believe offer solid fundamentals with strong growth potential.
They’re not always easy to find, and as always there are still risks involved. But once you start looking, it is hard to ignore them.
For Money Morning